Orion Office REIT Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Orion Office REIT, Real Estate Investments and Related Intangibles

Orion Office REIT, Real Estate Investments and Related Intangibles

12 Months Ended

Dec. 31, 2023

Real Estate [Abstract]

Real Estate Investments and Related Intangibles

Note 3 – Real Estate Investments and Related Intangibles

Property Acquisitions

During the year ended December 31, 2022, the Company acquired for no consideration the fee interest in one parcel of land in connection with the maturity of the tax advantaged bond and ground lease structure. As a result of the transaction, $4.7 million that was previously classified as a finance lease right-of-use asset with respect to such land parcel previously subject to the ground lease was reclassified from other assets, net to real estate investments in the Company’s consolidated balance sheet as of December 31, 2022. The Company did not have any other acquisitions during the year ended December 31, 2022, and during the years ended December 31, 2023 and 2021, the Company had no acquisitions.

Property Dispositions and Real Estate Assets Held for Sale

The following table summarizes the Company’s property dispositions for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands):


	Year Ended December 31,
	2023		2022		2021
Total dispositions	6		11		—
Aggregate gross sales price	$	25,425	$	33,098	$	—

Gain on disposition of real estate assets	$	31	$	2,352	$	—
Property count	3		5		—

Impairments on disposition of real estate assets	$	575	$	5,089	$	—
Property count	3		6		—

As of December 31, 2023, the Company had no properties classified as held for sale. During the years ended December 31, 2023 and 2022, the Company recorded losses of $4.4 million and $6.0 million, respectively, related to properties that were classified as held for sale and subsequently disposed, which are included in impairments in the accompanying consolidated and combined statements of operations.

Intangible Lease Assets and Liabilities

Intangible lease assets and liabilities consisted of the following (in thousands, except weighted-average useful life):


	Weighted-Average Useful Life (Years)	December 31, 2023		December 31, 2022
Intangible lease assets:
In-place leases, net of accumulated amortization of $193,470 and $144,798, respectively	6.4	$	103,997	$	177,698
Leasing commissions, net of accumulated amortization of $3,033 and $1,553, respectively	12.4	13,539		13,614
Above-market lease assets, net of accumulated amortization of $10,372 and $11,391, respectively	7.0	5,006		9,826
Deferred lease incentives, net of accumulated amortization of $419 and $116, respectively	10.5	3,822		1,694
Total intangible lease assets, net		$	126,364	$	202,832

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $23,176 and $17,249, respectively	10.8	$	8,074	$	14,068

The aggregate amount of amortization of above-market and below-market leases included as a net increase to rental revenue was $1.2 million, $1.2 million and $1.0 million for the years ended December 31, 2023, 2022 and 2021, respectively. The aggregate amount of amortization of deferred lease incentives included as a net decrease to rental revenue was $0.3 million and $0.1 million for the years ended December 31, 2023 and 2022, respectively, as compared to no impact to rental revenue for the year ended December 31, 2021. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $75.0 million, $95.4 million and $23.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.

The following table provides the projected amortization expense and adjustments to rental revenue related to the intangible lease assets and liabilities for the next five years as of December 31, 2023 (in thousands):


	2024		2025		2026		2027		2028
In-place leases:
Total projected to be included in amortization expense	$	49,028	$	21,608	$	15,499	$	7,441	$	4,592
Leasing commissions:
Total projected to be included in amortization expense	$	1,497	$	1,430	$	1,426	$	1,399	$	1,251
Above-market lease assets:
Total projected to be deducted from rental revenue	$	2,960	$	850	$	682	$	237	$	115
Deferred lease incentives:
Total projected to be deducted from rental revenue	$	489	$	473	$	375	$	351	$	338
Below-market lease liabilities:
Total projected to be added to rental revenue	$	3,786	$	1,036	$	817	$	655	$	571

Consolidated Joint Venture

The Company had an interest in one consolidated joint venture that owned one property as of December 31, 2023 and 2022. As of December 31, 2023 and 2022, the consolidated joint venture had total assets of $27.6 million and $27.7 million, respectively, of which $23.5 million and $24.9 million, respectively, were real estate investments, net of accumulated depreciation and amortization. The Company’s joint venture partner is the managing member of the joint venture. However, in accordance with the joint venture agreement, the Company has the ability to control the operating and financing policies of the consolidated joint venture and the joint venture partner must obtain the Company’s approval for any major transactions. The Company and the joint venture partner are subject to the provisions of the joint venture agreement, which includes provisions for when additional contributions may be required to fund certain cash shortfalls.

Investment in Unconsolidated Joint Venture

The following is a summary of the Company’s investment in the Arch Street Joint Venture, as of December 31, 2023 and 2022 and for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands):


	Ownership % (1)	Number of Properties	Carrying Value of Investment				Equity in Loss, Net
							Year Ended (2)
Investment	December 31, 2023		December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022		December 31, 2021
Arch Street Joint Venture (3) (4)	20%	6	$	13,549	$	15,824	$	(435)	$	(524)	$	(56)

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(1)The Company’s ownership interest reflects its legal ownership interest. The Company’s legal ownership interest may, at times, not equal the Company’s economic interest because of various provisions in the joint venture agreement regarding capital contributions, distributions of cash flow based on capital account balances and allocations of profits and losses. As a result, the Company’s actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with its legal ownership interest.

(2)The interest in the Arch Street Joint Venture was acquired by Realty Income as part of the merger transaction with VEREIT and was transferred to the Company upon the consummation of the Distribution. Therefore, the Company’s equity in loss, net reflects operations following November 1, 2021.

(3)During the years ended December 31, 2023 and 2022, the Arch Street Joint Venture did not acquire any properties. During the year ended December 31, 2021, the Arch Street Joint Venture acquired one property from a third party for a purchase price of $30.5 million.

(4)The total carrying value of the Company’s investment in the Arch Street Joint Venture was greater than the underlying equity in net assets by $0.4 million and $0.9 million as of December 31, 2023 and 2022, respectively. This difference is related to a step up in the fair value of the investment in the Arch Street Joint Venture in connection with the Separation and the Distribution. The step up in fair value was allocated based on the underlying assets and liabilities of the Arch Street Joint Venture and is being amortized over the estimated useful lives of the respective assets and liabilities in accordance with the Company’s accounting policies.